Yellen defends regulatory reforms brought in during crisis

Fed chair tells Jackson Hole gathering that regulations have boosted resilience

Fed chairwoman  Janet Yellen at Jackson Hole. She said  reforms have made the system “substantially safer”

Fed chairwoman Janet Yellen at Jackson Hole. She said reforms have made the system “substantially safer”


Janet Yellen stepped up the Federal Reserve’s defence of regulatory reforms pushed through after the financial crisis in the face of claims from some Republican politicians that the regime is stifling the economy. Her speech was followed by one from the European Central Bank’s President Mario Draghi, who said open trade and global cooperation is vital to lift growth, warning against the threat of protectionism to the world economy.

The Federal Reserve chairwoman said in a speech at Jackson Hole, Wyoming, that the reforms have made the system “substantially safer” and are not weighing on growth or lending.

Ms Yellen’s public support for the broad thrust of the regulatory regime comes amid Republican calls for a loosening of financial rules. Stanley Fischer, the Fed’s vice-chairman, this month called such demands “extremely dangerous and extremely short-sighted”. On Thursday Robert Kaplan, the Dallas Fed chief, said it would be hazardous to loosen regulation at a time of soaring asset prices.

Ms Yellen was speaking at what may be her last Jackson Hole gathering as Fed chairwoman, depending on deliberations in the White House in coming months. President Donald Trump is currently assessing whether to reappoint her when her term expires in February.

Among the likely considerations are the president’s appetite to loosen the regulatory strictures on banks. He has already nominated a new Fed vice-chair of financial supervision, Randal Quarles, who has signalled an appetite to lessen the burden of regulation.

Big number 

Mr Trump has vowed to “do a big number” on the Dodd-Frank law that implemented much of the post-crisis regime.

The US treasury in June put out a 147-page report that recommended, among other things, changing the frequency and the severity of the Fed’s process of stress-testing the strength of the big banks, scrapping the “gold-plating” of global capital and liquidity standards for the largest US lenders, and implementing a looser interpretation of the Volcker ban on banks making speculative bets with their own capital.

“The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” Ms Yellen said.

She did not in her speech suggest that she has immediate worries about the stability of the financial sector today despite warning signals sent up by Fed officials about surging asset values.

Some traders had thought she might address asset prices as a justification for tightening monetary policy further this year. The dollar index, which measures the US currency against a basket of peers, fell 0.5 per cent to 92.80 after the address.

The yield on the 10-year Treasury also dipped from 2.20 per cent earlier on Friday to a low of 2.16 per cent.


However, Ms Yellen did say that “sooner or later” the familiar risks of excessive optimism, leverage and maturity transformation would re-emerge. If the lessons of the last crisis were remembered “we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly”.

While some lawmakers argue that the ratcheting up of capital standards is hampering firms’ ability to lend, Ms Yellen said research pointed to “sizeable net benefits to economic growth from higher capital standards”.

She said while credit was less available to borrowers with poorer credit histories, there were a number of drivers behind this issue. Changes in capital and liquidity regulations were “perhaps to a limited degree” affecting mortgage lending.

“Any adjustments to the regulatory framework should be modest, and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.”

Draghi support

In a later speech the ECB President Mario Draghi said open trade and global cooperation is vital to lift growth, warning against the threat of protectionism to the world economy.

He said the ECB’s ultra easy monetary policy is successful and the euro zone’s economic recovery is taking hold, but patience is still needed for inflation to converge with the bank’s target. Draghi said he was confident inflation would converge with the ECB’s target of almost 2 percent as output rises towards capacity. He noted that slack in the labour market for now was keeping wage growth and ultimately inflation muted.

“A turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy,”

Draghi said in a speech that did not touch on current monetary policy. “To foster a dynamic global economy we need to resist protectionist urges.”

Much like Fed Chair Janet Yellen earlier, Draghi defended global financial regulation, which was bolstered after the crisis. “Given the large collective costs that we have observed, there is never a good time for lax regulation,”

Draghi said. “But there are times when it is especially inopportune.” “Specifically, when monetary policy is accommodative, lax regulation runs the risk of stoking financial imbalances,” he added.

– Copyright The Financial Times Ltd/Reuters